Why Ontario smokers still flock to the black market 1 year into pot legalization

October 17, 2019

A year after the federal government legalized recreational pot, Ontario trails the other provinces in its plan to distribute and sell the product, according to some industry watchers and experts.

And that has allowed the black market to thrive.

“At this point, we’re lagging the most behind,” said Michael Armstrong, associate professor at the Goodman School of Business at Brock University.

The main issue? A lack of physical store locations.

In January, the province awarded its first 25 licences for stores, citing national supply chain issues and product shortages.

By July, the government announced it was issuing 50 more, eight of which will be in First Nations communities, making it a total of 75 stores in the country’s most populous province.

Experts are looking back on a year of legalization as regulations for edibles and topicals take effect Thursday. While products might not be on store shelves until later this year, “Legalization 2.0,” as some have dubbed it, may just take a big chunk out of black market profits. After all, a Deloitte report estimates the market for edible and topical cannabis is worth $2.7 billion. That’s on top of the $6-billion market for recreational and medical cannabis.

‘Out of touch’

But in the beginning, the provincial government’s slow rollout of stores was “out of touch,” Armstrong said. Critics say not only were too few stores opened, but the lottery system used to choose the potential licence holders was not based on merit.

Even now, only 24 legal pot shops are open and operating in Ontario. Customers cited a lack of stores and the lower cost of illegal pot as reasons they still buy on the black market.

The province’s Ministry of the Attorney General told CBC News the government is working to “return to our original plan to allocate retail store licences based on market demand.”

The ministry could not say when that would happen.

Shops in other provinces

Other provinces seem to be progressing in their plans to open more stores, despite also running into hurdles in the past year. Last week, Quebec announced plans to more than double the number of physical stores by next March, from 20 to 43.

Alberta, opting to go the route of private retail sales, lists more than 300 pot shops in the province. In July 2019, Statistics Canada reported legal cannabis sales surpassed $21 million there, compared to $29.6 million in Ontario, which has more than three times the population.

British Columbia’s private retail stores have also been slow to open, but the province now has 85.

Federal regulations

Lawyer Kendra Stanyon also said federal regulations for producers have frozen some of her clients and prospective clients out of the market.

She said many growers who wanted to join the legal market weren’t able to because they simply didn’t have the capital since rules dictate potential producers have to have a facility before they can qualify for a licence to grow.

“That’s a bit of a pipe dream for a lot of skilled growers who might not have the $3 million or $4 million,” said Stanyon.

She said the federal government has also been slow to give licences to small scale growers. As of Sept. 30, Health Canada confirms nine sites have been granted micro-licences. Only three are open so far.

These producers are limited to 200 square metres of growing space and are not allowed to process more than 600 kilograms of pot each year. The idea was to allow small businesses to flourish and welcome black market growers into the legal realm.

The hope of creating a “craft industry” hasn’t happened yet, said Stanyon.

Profits

Meanwhile, Statistics Canada figures show black market cannabis production decreased by about 20 per cent since legalization.

While business is good, the owner of Toronto’s first legal pot shop doesn’t deny the illegal sales cut into his profits.

“If there was no black market, we’d definitely see a boom,” said Hunny Gawri, owner of The Hunny Pot.

The Ontario government also hasn’t broken even selling pot. In mid-September, public documents showed the Ontario Cannabis Store lost $42 million in the latest fiscal year. It reported $64 million in revenue and $106 million in expenses. Finance Minister Rod Phillips attributed the loss to startup costs.

Gawri and the industry experts point out there will ultimately be kinks to work out just a year into legalization.

“This is a new industry,” said Stanyon.

Legalization has been “limited success,” Armstrong said.

“We have producers. We have retailers. An initial chunk of the market has gone over to the legal side, so that’s a step forward.”